Strategy, Innovation, Business Models, Proptech, RETech

Sharing Won’t Change Real Estate

Coworking and coliving are all the rage, but focusing on customers’ needs points to a much larger opportunity.

Consumer products are developed with a specific customer in mind. Real estate often isn’t: A space is expected to serve anyone who happens to pay for it. The customers need to determine whether the space fits their needs, and then to furnish it, erect additional partitions, install various systems and tools, and sometimes even find other customers to occupy unused areas or take up the remainder of a standard-term lease. They have to rely on various service providers in order to create the product for themselves.

Most real estate owners and operators are driven by “How to fill the space?” and not by “How to serve the customer?”. An old 3-bedroom apartment in Manhattan, for example, was first shared by three separate families, then by one family of five, then by a grandma and her domestic helper, and finally by a group of four roommates. The space wasn’t ideal for any of them, but it was good enough.

Let’s imagine a different scenario: A real estate operator decides to focus on a specific group of customers and develops a product and offering that suits their needs. All the customers need to do is pay and move in; they get what they want, when they want it. Focusing on the customer creates a relationship. The space itself is now secondary — the operator can move its business to the building next door and the customer will follow. Controlling the customer relationship is more valuable than the underlying real estate.

This is what WeWork did. It started by focusing on an under-served segment of the office market, catering to the smallest and least valuable customers who could barely commit to a lease or buy their own desk. It facilitated the sharing of larger spaces. But sharing is not an end in itself; it is simply the best way to serve this specific group of customers at a price that makes sense. Focusing on a different group of customers would result in a different type of solution, probably without any sharing at all.

This is already happening. WeWork recently signed a deal to lease a whole building to IBM, a single occupier that fills 70,000 sqf all on its own. The company’s enterprise division is now focused specifically on these type of customers. Knotel, a WeWork competitor, is focused exclusively on the enterprise market, providing what it calls “headquarters as a service”.

It turns out that even large companies want to enjoy a furnished office, designed and operated with their specific needs in mind. They don’t want to share, and don’t need too much flexibility either; they just want space as a service. In parallel, large corporate clients rely on services such as Breatherand Splacer to book space for more specific, short-term needs such as off-sites and events.

A similar dynamic is starting to emerge in the residential market: Coliving operators such as Common now offer studios and one-bedroom apartmentsfor those who can afford to live on their own. The company’s original membership model is now shifting towards more traditional yearlong leases; Ollie partners with traditional developers to design, furnish, market, and operate private and shared apartments for young professionals (and empty nesters). And companies such as Invitation Homes, OpenDoor, and Rezi are streamlining the home rental and acquisition markets.

New companies are adding a layer of services on top of traditional real estate assets and capture the relationship with the customer. In time, this would enable them to control more and more of the industry’s profits. Traditional real estate developers and operators are at the risk of becoming interchangeable pieces in a value chain dominated by others. If you build it, they would still come, but someone else might get all the money.

___

Will this be of interest to your friends and colleagues? Feel free to share: